Credit index, a system and method for structuring a credit index, and a system and method for operating a credit index

ABSTRACT

The present invention relates to a credit index, a system and method for structuring a credit index, a system and method for operating a credit index, and a system and method for determining the liquidity of a credit.

CROSS-REFERENCE TO RELATED APPLICATIONS

This application is a continuation of U.S. application Ser. No.10/164,083, filed Jun. 5, 2002, which claims the benefit of U.S.Provisional Application Ser. No. 60/295,856, filed Jun. 5, 2001 and U.S.Provisional Application Ser. No. 60/302,275, filed Jun. 29, 2001.

FIELD OF THE INVENTION

The present invention relates to a credit index, a system and method forstructuring a credit index, a system and method for operating a creditindex, and a system and method for determining the liquidity of acredit.

BACKGROUND OF THE INVENTION

Various mechanisms exist for tracking a broad market using a subset ofthe available financial instruments. Such mechanisms include “indexes”(i.e., dynamic subsets) of the financial instruments and “baskets”(i.e., static subsets) of the financial instruments. The markets maytypically include capital markets (wherein the market is tracked usingan index of stocks, for example) and credit markets (wherein the marketis tracked using an index of bonds, for example). For the purposes ofthe present application, the term “credit” is intended to include, butnot be limited to, a bond, a bank loan, and/or a credit derivative(e.g., a swap).

For example, a number of conventional stock indices exist (e.g., the S&P500, the Russell 2000, and the Russell 1000) which include a subset ofstocks chosen to track a relatively large universe of stocks (e.g.,small cap stocks, mid cap stocks, or large cap stocks). Theseconventional stock indices are typically priced on a continuous basis.More particularly, such conventional stock indices are typically pricedon a real time or quasi-real time basis.

Further, there exist conventional credit indices that include a subsetof credits chosen to track a relatively large universe of credits. Sucha relatively large universe of credits may comprise all investment gradecredits in a given market or all high yield credits in a given marketfor example. These conventional credit indices are typically pricedeither: 1) once per month; or 2) more frequently using “matrix pricing”(wherein the pricing is carried out using a derived pricing mechanism).While the timeliness of the pricing may be improved by including fewercredits in the index (thus enabling more frequent pricing using moreup-to-date data), the accuracy of the tracking of the broad market bythe conventional credit index has traditionally suffered (i.e., as fewercredits are included in the index the tracking error has traditionallyincreased). Further still, some these conventional credit indices arenot typically readily tradable in a widespread (e.g., public) market, atleast in part because the underlying credits are not typically “liquid”.

BRIEF DESCRIPTION OF THE DRAWINGS

FIG. 1 shows a mechanism for determining a Liquidity Score according toan embodiment of the present invention;

FIG. 2A shows a spreadsheet depicting various calculations according toan embodiment of the present invention;

FIG. 2B shows various formulas utilized in the spreadsheet of FIG. 2A;

FIG. 3A shows a spreadsheet depicting various calculations according toan embodiment of the present invention;

FIG. 3B shows various formulas utilized in the spreadsheet of FIG. 3A;

FIG. 4A shows a spreadsheet depicting various calculations according toan embodiment of the present invention;

FIG. 4B shows various formulas utilized in the spreadsheet of FIG. 4A;

FIG. 5A shows a spreadsheet depicting various calculations according toan embodiment of the present invention;

FIGS. 5B, 5C, and 5D show various formulas utilized in the spreadsheetof FIG. 5A;

FIG. 6A shows a spreadsheet depicting various calculations according toan embodiment of the present invention;

FIG. 6B shows various formulas utilized in the spreadsheet of FIG. 6A;

FIG. 7A shows a spreadsheet depicting various calculations according toan embodiment of the present invention;

FIG. 7B shows various formulas utilized in the spreadsheet of FIG. 7A;

FIG. 8 shows a mechanism by which risk factors are balanced to minimizethe tracking error to the broad market according to an embodiment of thepresent invention;

FIG. 9 shows a mechanism for giving an investor alternative risk profileoptions according to an embodiment of the present invention;

FIG. 10A shows a spreadsheet depicting an example Reference Profileassociated with an embodiment of the present invention;

FIG. 10B shows a diagram depicting an example Reference Profileassociated with an embodiment of the present invention;

FIG. 11 shows a mechanism for carrying out a total return swap accordingto an embodiment of the present invention; and

FIG. 12 shows a diagram depicting a “net gain testing” process accordingto an embodiment of the present invention.

Among those benefits and improvements that have been disclosed, otherobjects and advantages of this invention will become apparent from thefollowing description taken in conjunction with the accompanyingfigures. The figures constitute a part of this specification and includeillustrative embodiments of the present invention and illustrate variousobjects and features thereof.

DETAILED DESCRIPTION OF THE INVENTION

As required, detailed embodiments of the present invention are disclosedherein; however, it is to be understood that the disclosed embodimentsare merely illustrative of the invention that may be embodied in variousforms. In addition, each of the examples given in connection with thevarious embodiments of the invention are intended to be illustrative,and not restrictive. Further, the figures are not necessarily to scale;some features may be exaggerated to show details of particularcomponents. Therefore, specific structural and functional detailsdisclosed herein are not to be interpreted as limiting, but merely as abasis for the claims and as a representative basis for teaching oneskilled in the art to variously employ the present invention.

In one embodiment, a “Liquidity Score” according to the presentinvention may be utilized to objectively measure the expected liquidityof a given bond (e.g., a bond in an index, a bond being considered forinclusion in an index, or any other desired bond). Such a LiquidityScore may, in general, approximate the ease of transaction executionassociated with the bond. In practice, such a Liquidity Score maycomprise a number produced at least in part by mapping key variablesagainst one another (e.g., via a continuous function).

More particularly, in one example (which example is intended to beillustrative and not restrictive), a bond's Liquidity Score may becalculated using parameters including, but not limited to: a credit'ssize; the total issuance size of all credits of the issuer in an index;the age of the credit; the amount of equity that the issuer hasavailable; the profile of the debt (e.g. maturity, currency,subordination); the number of underwriters involved in the credittransaction; and/or the credit's sector categorization (e.g., industrysector (such as financial, non-financial, telecommunications, energy,etc.) and/or rating sector (such as AAA, BB, etc.)). In one specificexample shown in FIG. 1 (which example is intended to be illustrativeand not restrictive), the higher the credit's size and the issuer'soutstanding amounts, and the lower the credit's age, the higher theLiquidity Score.

In another specific example (which example is intended to beillustrative and not restrictive), the Liquidity Score may take intoaccount: 1) the bid/offer on the credit (e.g. the size of the differencebetween the bid and offer); 2) the “depth” of a market (i.e., how muchcan the market absorb without a significant price increase); 3) the sizeof a given credit transaction; and/or 4) the timeliness of theavailability of a credit.

In another specific example (which example is intended to beillustrative and not restrictive), the Liquidity Score may typicallytake into account: 1) the bid/offer on the credit (e.g. the size of thedifference between the bid and offer); and 2) the timeliness of theavailability of a credit, wherein the Liquidity Score may conditionallytake into account (in cases where an execution is large enough to pose apotential problem (e.g., to affect liquidity)) the “depth” of a market(i.e., how much can the market absorb without a significant priceincrease) and/or the size of a given credit transaction.

In another embodiment of the present invention, a liquid bond index maybe provided. In this regard, while the liquid index of this embodimentis described below with reference to various specifics (including, forexample, but not limited to: the number of bonds in the broad index andin the liquid index, the various disqualification parameters, thevarious formulas (e.g., the various functions and constants), the MarketProfile, etc.), it is noted that such specifics are provided asexamples, and that these examples are intended to be illustrative andnot restrictive. For example, the “Broad Index Composition” parameterand the “Disqualification” parameter can be combined into one generalparameter with subparts. As well, these parameters can be combined withthe “Liquidity Score” parameter into one general parameter withsubparts. Moreover, one or more the following listed subparts of eachgeneral parameter can be used to define the general parameter (e.g. notevery subpart is required to define the general parameter). For example,in another embodiment, the “Liquidity Score” parameter can be composedonly of the “incumbency premium.” In yet another example, the“disqualification” parameter can be composed of the subpart “chronicpoor bidding.” In yet a further embodiment, the “Broad IndexComposition” can be composed of one or more subparts listed below suchas “minimum face value” and “certain rating requirements.” In any case,the liquid index of this example may use the following bond selectionmethodology:

-   -   Broad Index Composition. From bonds available in the market,        select into a broad index (which broad index may be rebalanced        periodically (e.g., monthly) to add and/or remove bonds) the        bonds which meet the following criteria (such a selection        essentially identifies a Qualified Entrant Pool):        -   Denominated in USD (for a US broad index); denominated in            euro, euro-legacy-currency, and/or sterling (for a European            broad index).        -   Minimum face value of $x (e.g., $500 mm) for a US broad            index; minimum face value of            y (e.g.,            500 million or            500 million equivalent or            200 million or            200 million equivalent or            100 million or            100 million equivalent or £60 million or            60 million equivalent) for a European broad index.        -   Corporate issuer (no government, sovereign, quasi-sovereign,            or government-backed debt).        -   No more than x time period since issuance (e.g., 5 years).        -   At least y time period remaining to maturity (e.g., 3            years).        -   The issuer (or the issuer's guarantor, in the case of a            finance subsidiary) must be domiciled (and/or have most of            its operations) in certain countries. For example: Andorra,            Austria, Belgium, Denmark, Faeroe Islands, Finland, France,            Germany, Gibraltar, Greece, Iceland, Ireland, Italy,            Liechtenstein, Luxembourg, Malta, Monaco, Netherlands,            Norway, Portugal, San Marino, Spain, Sweden, Switzerland,            United Kingdom, Vatican City State, United States, Canada,            and/or Japan.        -   Must meet certain rating requirements (e.g.: Must be rated            between AAA and BBB- by S&P and/or Aaa and Baa3 by Moody's            if rated by both agencies. If rated by only one agency, that            rating must be investment grade. In one specific example, if            the bond is rated by neither S&P nor Moody's, it is not a            candidate. In another specific example, the bond must be            rated by both agencies.).        -   Exclude specific types of bonds (e.g.: i. Split-rated bonds            (e.g., BB+ or below or Ba1 or below); ii. Floating rate            notes; iii. Callables and Puttables (except for callables at            make whole, which may enter); iv. convertibles, preferreds,            or bonds with other equity features attached; v. MTNs; vi.            Private placements (Rule 144A); vii. Dollar Eurobonds (for            US broad index) [Globals may enter]); viii. debt issued by a            sponsor and/or administrator of the liquid index (to help            eliminate any potential illegal solicitation under any            appropriate governmental and/or trading regulations); and/or            iix. Yankees (i.e., debt issued by an issuer domiciled            outside the U.S. who issues dollar amount debt security and            does not issue into the global market (i.e., a market that            trades in multiple places).        -   Include specific types of bonds (e.g.: i. Sinkables; ii.            Step-ups; iii. Zeroes (but excluded from the liquid            index); iv. Perpetuals).    -   Disqualification. From the Broad Index Composition, disqualify        bonds that meet at least one of the following criteria:        -   Chronic poor bidding performance. If the bond's spread to            the government benchmark (e.g., 10 year treasury) that is            bid by a specified trader is x basis points (e.g., 250 basis            points) over the average spread for the broad index (e.g.            corporate bonds) for y or more business days (e.g, 6 or more            business days) over the prior z months (e.g., 2 months), the            bond is disqualified from the liquid index for a period ofj            months (e.g., 6 months). An incumbent bond in the liquid            index that meets this chronic poor bidding performance            criteria will be removed from the liquid index. Of note, y            may be selected so that the test occurs over 2 or more            different calendar weeks (to factor out the vacation of a            trader, for example); z may be selected so that the test            spans a change in months; and j may be selected to allow a            bond to “cool-off” such that a market may re-develop for the            bond. In general, this test may be used to examine a bond's            recent history.        -   Lockout period. Any bond that falls out of the liquid index,            but remains in the broad index, faces a x-month lockout            period (e.g., 3 month lockout period) before it can re-enter            the liquid index. Of note, x may be selected to allow a bond            to “cool-off” such that a market may re-develop for the            bond.        -   Minimum potential run. Any bond that enters the liquid index            must have a minimum potential run in the liquid index of at            least x months (e.g., 6 months). Thus, in one example there            must be at least 3 years and 6 months remaining to maturity            when the broad index requirement is at least 3 years            remaining to maturity.        -   Spread Volatility. The x-month (e.g., 3 month) par asset            swap spread histories of all bonds in the broad index are            scanned. From each bond's spread history, a standard            deviation of the daily changes is computed, and the natural            logarithm of that value is recorded into a vector. From the            vector of such volatilities, a mean (μ) and standard            deviation (σ) are computed. Any bond whose volatility is            greater than a specific value, for example, μ+2.576σ            (corresponding to a 1% percentile under a normal            distribution assumption), is disqualified from candidacy in            the liquid index for a period of y months (e.g., 6 months).            An incumbent bond in the liquid index that meets this spread            volatility criteria will be removed from the liquid index. A            bond with fewer than x months (e.g., 3 months) of spread            history in the index will automatically test negative (i.e.,            will not be disqualified for this reason). Of note, this            test may be applied in the context of USD, LIBOR, and/or            EURO basis points, for example.    -   Liquidity Score. From the Broad Index Composition, after        applying the Disqualification criteria, every bond that is a        qualified entrant to the liquid index is assigned a Liquidity        Score. This Liquidity Score approximates the ease of transaction        execution. The Liquidity Score may be an additive composite of 3        factors:        -   Raw Score. The raw score 3-D surface is a mathematical            function of the age and size of the bond, with parameters            constructed by studying actual trading data and overall            trader expertise. More particularly, in one example the Raw            Score is determined using the formula:

RAW SCORE=max(0, 3×ln(size)−15)×exp(−0.3×avg age)

-   -   -   where avg age is the face-weighted average age of all the            add-ons plus the original principal that are part of the            total bond (e.g., if a $1b face bond that is 1 year old had            a $1b add-on 6 months ago, the average age would be 0.75            years), size is the monetary value (in $ millions) of all            the add-ons plus the original principal that is part of the            total bond, ln is the natural log [i.e., the notation            “ln(size)” means “take the natural log of the size”], exp is            the base of the natural log [i.e., the notation            “exp(−0.3×avg age)” means “raise the value of −0.3 times avg            age to the base of the natural log], and the function max(0,            3×ln(size)−15)×exp(−0.3×avg age) sets a floor for the value            of RAW SCORE at zero. In another example (which example is            intended to be illustrative and not restrictive), the            constant 3 may be replaced by any other desired constant            (e.g., the constant 1.5), the constant 15 may be replaced by            any other desired constant (e.g., the constant 6), and the            constant −0.3 may be replaced by any other desired constant.            Of note, the Raw Score decays with increasing age (due to            the exp function) and increases with increasing size (due to            the ln function—which may provide a growth function which            provides rapid growth from about 1 billion to about 2            billion dollars and less rapid growth above about 2 billion            dollars). In addition, other functions which perform such            manipulation may, of course, be used.        -   Issuer Premium. All issuers are ranked based on age-adjusted            total public qualified debt (i.e., all of the debt they have            issued that has qualified for the index), where each bond's            size is decremented by a decremeting term (e.g., the term            exp(−0.3×avg age)). The aggregate age-adjusted debt of every            issuer is calculated, the largest one identified (“MAX”),            and each issuer is assigned a Model Issuer Premium as            follows:

MODEL ISSUER PREMIUM=12×(Issuer aggregate age-adjusted debt/MAX)

-   -   -   Of note, the constant 12 in the formula above is given as an            example only, and any other desired constant (e.g., 10) may            be used. In addition, the decremeting term exp(−0.3×avg age)            is given as an example only, and any other decrementing term            using any desired constant(s) and/or function(s) may be            used. In any case, the largest issue (of an issuer) is            awarded the full Model Issuer Premium and every other issue            of the issuer is awarded a fraction of the full Model Issuer            Premium (“Applied Issuer Premium”) proportionate to the            ratio of its RAW score to the largest RAW score of the            issuer.        -   Incumbency Premium. Bonds that were members of the liquid            index in at least the prior month are assigned an            “Incumbency Premium” to reflect the notion that a new entry            candidate would have to outscore an incumbent by a            reasonable margin of additional liquidity in order to            justify the expense of the trade (and/or to control            turnover). In one example (which example is intended to be            illustrative and not restrictive), the Incumbency Premium is            calculated as follows:

INCUMBENCY PREMIUM=6.0×exp(−0.3×avg age)

-   -   -   In another example (which example is intended to be            illustrative and not restrictive), the constant 6 may be            replaced by any other desired constant and the constant −0.3            may be replaced by any other desired constant. Of note, the            Incumbency Premium decays with increasing age (due to the            exp function) and any other functions which perform such            manipulation may, of course, be used. Of further note, the            Incumbency Premium may be utilized to help achieve an            optimum and/or desired balance between turnover (which, in            one example, should be minimized), market representation,            and tracking error (which, in one example should be            minimized). Finally, it is noted that all other bonds from            an issuer who has an incumbent bond may also receive a            premium equal to (in one example, which example is intended            to be illustrative and not restrictive) 2.4×exp(−0.3×avg            age). This “intra-issuer incumbency premium” may help to            facilitate a move to the on-the-run bond within a large            complex of debt from a single issuer.

    -   Market Profile With Periodic (e.g., Annual) Updates. Profile the        broad index across industry sector and maturity dimensions by        segmenting the bonds into an A×B matrix (e.g., 3×2). For        example, the matrix may comprise 3 maturity classes (e.g.,        5-10-30 years to maturity) on one axis, and 2 industry sectors        (e.g., Financial and Non-financial sectors) on the other axis.        Populate each cell in the liquid index with a selected number of        bonds, with the number of bonds in the cell (from a total of x        bonds comprising the liquid index (e.g., 30 bonds to 100 bonds))        determined by weighting each cell's numerical bond population        proportionately to the percent par amount outstanding in the        same cell of the broad index. A new market profile may be        created periodically (e.g., every November 1—a date roughly        corresponding to the end of the underwriting season) and the        cell profile of the liquid index may be changed to reflect the        broad market changes, if needed.

    -   Selection Process. The x bonds of the liquid index (e.g., the 30        to 100 bonds) are chosen in the following three phases:        -   Start with the new month's index' initial composition with            the incumbent bond set from the prior month. All eligible            but non-incumbent bonds are subsequently rank-ordered by            Liquidity Score. The universe of non-incumbent bonds that            are considered eligible for entry into the index consists            of: new issuance during the month, and previously issued            bonds in each cell with a Liquidity Score ranking higher            than the lowest-scoring incumbent bond in that cell.        -   Check to see if the cell is accurately populated with the            required number of bonds (based on the market profiling            described above). If so, go to the next step. If not, remove            bonds from the cells with excess bonds by eliminating the            bonds with the lowest Liquidity Score and add bonds to the            deficient cells by choosing the bonds with the highest            Liquidity Score available for the cell from the eligible            set. Note that there can be fewer than x number of            incumbents (e.g., 30 to 100) at the end of a given period if            an incumbent is disqualified due to spread volatility or            chronic poor bidding, for example. Conduct this population            process by rank ordering cells by average Liquidity Score            and favoring the cell with the lowest Liquidity Score first.            Repeat the rank ordering for each pass of the populating            process (i.e., each pass of one or more iterations).        -   Examine whether additional swaps of incumbent bonds for            non-incumbent bonds will increase the average Liquidity            Score of the index and, if so, execute those swaps (subject            to any x-issue-per-issuer rule, wherein x is a number such            as 1, 2, or 3, for example). Conduct this swap also by rank            ordering cells by average Liquidity Score, favoring the            cells with the lowest average Liquidity Score on each round            (i.e., each pass of one or more iterations). When an            incumbent issuer's non-incumbent bond is considered for            entry into the index, it must satisfy the following two            conditions: 1) it must add to the average Liquidity Score of            the cell; and 2) it must add to the average Liquidity Score            of the liquid index (i.e., the exiting incumbent bond must            be replaced by a non-incumbent bond such that there is a net            gain in the average Liquidity Score of the liquid index from            the coupled transactions).        -   Of note, the initial selection process for an index (i.e.,            where there are no incumbents) is carried out in a similar            manner without regard to any incumbent bonds.        -   Of further note, in another example the selection process            described above may be thought of in a simplified manner as            consisting of ranking the Liquidity Scores of each bond in            each cell and using those bonds (subject to the required            number of bonds in each cell) with the highest Liquidity            Scores.

    -   Bond Weighting. Every bond in the liquid index may be equally        weighted, on a par amount basis, to every other bond in the        liquid index. However, as stated in the rules above, by        populating the larger market segments with proportionately more        bonds, the percent aggregate par value weight of each cell in        the liquid index may be broadly proportional to the percentage        par value weight of that cell in the broad market. (In another        example, every bond in a liquid index cell may be equally        weighted, on a par amount basis, to every other bond in that        cell (wherein improved market representation may be obtained)).

Although the above-described bond selection methodology (including BroadIndex Composition, Disqualification, Liquidity Score, Market ProfileWith Updates, Selection Process, and Bond Weighting) was illustratedwith reference to carrying out the operation in a specific order, anyother desired order may, of course, be utilized for operation.

Referring now to FIGS. 2A-7B, various spreadsheets providing additionaldetail related to the above-described bond selection methodology usingexample bonds, values, and calculations (which example bonds, values,and calculations are intended to be illustrative and not restrictive)are provided.

More particularly, FIG. 2A shows (in cells A4-D49) a first step inwhich: (a) various issuers included in a broad index are rankedaccording to the value of their decayed debt; and (b) each issuer isassigned a Model Premium (note that for the sake of simplicity 45issuers are depicted in FIG. 2A, although any desired number of issuersmay be included in the broad index and/or included in the processdepicted in this FIG. 2A). Further, FIG. 2B shows (in cells A4-D49) theformulas utilized in the spreadsheet of FIG. 2A. For example:

-   -   Model Premium for Ford Motors=(the Decayed Debt of Ford        Motors/the Decayed Debt of Ford Motors [the number 1 ranking        issuer])×12    -   Model Premium of Wells Fargo=(the Decayed Debt of Wells        Fargo/the Decayed Debt of Form Motors [the number 1 ranking        issuer])×12).

Still referring to the Decayed Debt of FIGS. 2A and 2B, it is noted thatamounts depicted differ slightly due to rounding. In addition, it isnoted that FIGS. 3A, 3B, 4A, and 4B provide more detail regarding thecalculation of the Decayed Debt of FIGS. 2A and 2B.

More particularly, FIG. 3A shows (in cells H12-M30) a detailedcalculation example of the Decayed Debt of FIGS. 2A and 2B for one ofthe issuers (i.e., General Motors). Further, FIG. 3B shows (in cellsH12-M30) the formulas utilized in the spreadsheet of FIG. 3A. Forexample:

-   -   Decayed Size (or Decayed Debt) [of each individual credit        issue]=Size [of the issue]×exp(−0.3×Age [of the individual        credit issue]), wherein the Age equals a current date minus an        issue date divided by 365.25    -   Total Decayed Size (or Total Decayed Debt) [for the issuer]=Sum        of Decayed Sizes [of each individual credit]

Still referring to FIGS. 3A and 3B, it is noted that the date valuesshown in FIG. 3B are intended to correspond to the conventionalnomenclature shown in FIG. 3A. In addition, it is noted that FIGS. 4Aand 4B provide more detail regarding the calculation of the Age shown inFIGS. 3A and 3B.

More particularly, it is shown in FIG. 4A (in cells H34-L47) how add-onsto three of the General Motors credits shown in FIG. 3A (i.e. cells L20,L21, and L23) affect the Age calculation. This modified Age calculationis shown in detail in FIG. 4B, where it is seen (with reference to thefirst General Motors credit [i.e., Secid=27050415], for example, that:

-   -   Total Size [identified in the Size Change column]=the size of        the credit+the size of the add-on    -   % Size [of the credit or of the add-on]=size of the credit [or        of the add-on]/Total Size    -   Term [of the credit or of the add-on]=(a current date−issue        date)/365.25    -   Term [of the combined credit with add-on; as shown in the Age        column in FIG. 3A]=(the term of the credit×the % size of the        credit)+(the term of the add-on×the % size of the add-on)

Referring now to FIG. 5A, it is seen that this Fig. shows (in cellsB10-H32) the steps for calculating a Liquidity Score for a bond(including the step of assigning specific premiums to each bond fromeach issuer based on the % of each bond's Raw Score relative to the topscoring bond from each issuer).

More particularly, FIGS. 5B, 5C, and 5D show (in cells B10-H32) thevarious formulas used in the spreadsheet of FIG. 5A. For example (inconnection with three AT&T Wireless bonds):

-   -   A Raw Score for each of the three bonds is calculated using the        formula: Raw Score=exp(−0.3× the age of the bond))×max (0,        3×ln(the size of the bond)−15))    -   A Maximum Raw Score selected from the three Raw Scores is        determined    -   The bond with the Maximum Raw Score gets an Incumbency        Premium=6×exp(−0.3×the age of the bond).    -   The remaining bonds (i.e., the bonds that do not have the        Maximum Raw Score) get Incumbency Premiums=Maximum Incumbency        Premium×0.4    -   Each bond gets assigned an Applied Issuer Premium as follows:        the largest issue (of an issuer) is awarded the full Model        Issuer Premium and every other issue of the issuer is awarded a        fraction of the full Model Issuer Premium (“Applied Issuer        Premium”) proportionate to the ratio of its RAW score to the        largest RAW score of the issuer. Note that the “‘Issuer        Premium’!$D$21” factor of the spreadsheet of FIG. 5D relates        back to the spreadsheet of FIG. 2A.    -   Each bond is assigned a Liquidity Score=the bond's Raw Score+the        bond's Incumbency Premium+the bond's Applied Issuer Premium

Referring now to FIG. 6A, a spreadsheet showing the calculation of %weighting of various bonds (i.e., the 5 unnamed bonds in rows 7-11) isprovided. More particularly, FIG. 6B shows the formulas used in thespreadsheet of FIG. 6A, including:

-   -   Calculating Market Size for each of the bonds as Market        Size=Size×Present Value    -   Calculating Total Market Size of all of the bonds as Total        Market Size=the sum of the Market Sizes of each of the bonds    -   Calculating the % Market Size for each of the bonds as % Market        Size=Market Size of each bond/Total Market Size

Referring now to FIG. 7A, a spreadsheet showing the calculation of PureMarket Weighting of various bonds (i.e., the 5 unnamed bonds in rows7-11) is provided. More particularly, FIG. 7B shows the formulas used inthe spreadsheet of FIG. 7A, including:

-   -   Calculating Market Size for each of the bonds as Market        Size=Size×Present Value    -   Calculating Total Market Size of all of the bonds as Total        Market Size=the sum of the Market Sizes of each of the bonds    -   Calculating the % Market Size for each of the bonds as % Market        Size=Market Size of each bond/Total Market Size    -   Calculating the Market Weighting of each bond as Market        Weighting=Face (of each bond)×Present Value (of each bond)    -   Calculating Total Market Weighting of all of the bonds as Total        Market Weighting=the sum of the Market Weights of each of the        bonds    -   Calculating the % Market Weighting for each of the bonds as %        Market Weight=Market Weight of each bond/Total Market Weight

Of note, in connection with FIGS. 6A, 6B, 7A, and 7B, the “face” is theamount outstanding and the “size” is an equal weight factor. Of furthernote, columns “E” and “H” of FIGS. 6A, 6B, 7A, and 7B reflect equal parweight (which type of weighting may be used for a liquid index, forexample) and columns “J” and “K” of FIGS. 7A and 7B reflect actual faceamounts (which type of weighting may be used for a broad index and/or aTotal Return Swap, for example).

In another embodiment, a credit index according to the present inventionmay provide a mechanism to satisfy the need for a benchmark which: 1)accurately and timely tracks a broad market; 2) has “investor-friendly”features; and/or 3) may be used for performance management to enhancerisk exposure and expected return.

In one example, which example is intended to be illustrative and notrestrictive, such a benchmark may include, but not be limited to, alarge cap or high yield liquid index of an investment grade which may betimely and frequently priced (e.g., essentially continuously inreal-time (such as by the split second or by the second), in a delayedmanner in quasi real-time (such as by the minute or by the hour), afixed number of times during the day (such as 5 times daily), and/ordaily). Such frequent pricing may permit index users to respond morequickly to market moves.

Further, the “investor-friendly” features may include: 1) an index whichis open and transparent (e.g., data at index, sub-index, and/or bondlevel may be available to an investor), 2) an index which is audited(e.g., by a third party), 3) an index which is governed by a policycommittee (members of which may be independent of the party initiatingthe index), 4) an index which is easy to understand (e.g., a rule-basedindex with commercial market applications); 5) an index with a web-basedinterface (e.g., one or more web pages) for providing market analytics(e.g., real-time and/or historic performance on any index or sub-indexdown to the individual bond level; 6) an index for which indexquotations are available on one or more major financial media providers,and/or 7) an index run by a market leader with a long term commitment.

In another embodiment, a tradeable, liquid credit index according to thepresent invention may provide a mechanism by which risk factors arebalanced to minimize the tracking error to the broad market. Moreparticularly, as seen in one specific example shown in FIG. 8 (whichexample is intended to be illustrative and not restrictive), the designof a tradeable, liquid credit index according to the instant inventionmay recognize different risk factors (e.g., Ratings, Sectors, andMaturity) in a multi-dimensional array used in constructing an indextracking algorithm. Each cell (or “sub-index”) of the array may bearranged in a manner similar to the manner in which a given market dealswith risk. For example (which example is intended to be illustrative,and not restrictive), if a given cell has a particular weight inrelation to the broad market, the tradeable, liquid credit index of thepresent invention may weight that cell with the same weight given by thebroad market and certain credits may be selected into the cell andindividually weighted so that the overall tradeable, liquid credit indextracks the broader market (which itself may be represented by a broad oraggregate credit index for tracking purposes).

In another embodiment, a tradeable, liquid credit index according to thepresent invention may again provide a mechanism by which risk factorsare balanced to minimize the tracking error to the broad market. Moreparticularly, as seen in FIG. 8, the design of a tradeable, liquidcredit index according to the instant invention may recognize differentrisk factors (e.g., Ratings, Sectors, and Maturity) in amulti-dimensional array used in constructing an index trackingalgorithm. In this example (which example is intended to be illustrativeand not restrictive), each row, column and height may be arranged in amanner similar to the manner in which a given market deals with risk(e.g., the rows, columns and heights may form “building blocks”—used formatching the profile of a market).

In another embodiment, a credit index according to the present inventionmay provide a financial vehicle that is appropriate to the increasedcredit specialization spreading across the fixed income markets assophisticated managers are developing expertise to separate themanagement of duration/curve risk from credit risk.

In another embodiment, a credit index according to the present inventionmay provide a mechanism by which index quotes represent executablepricing, rather than indicative levels.

In another embodiment, a credit index according to the present inventionmay provide a mechanism by which credits within the index are pricedindividually (e.g., by a trading desk), rather than via matrix pricing.

In another embodiment, a credit index according to the present inventionmay provide a mechanism by which transaction costs are incorporated intothe calculation of the credit index (e.g., credits may enter the indexon the offered side while being marked on the bid side). While suchincorporation of transaction costs may generate more conservativereturns, it should report a level that an investor is more likely toexperience while attempting to outperform the market.

In another embodiment, a credit index according to the present inventionmay comprise a liquid index that is a subset of a broader, aggregateindex. Such a liquid index may represent the most liquid part of a broadmarket (e.g., a credit market), have a low tracking error, and/or bebalanced and representative of the broad market.

In another embodiment, a credit index according to the present inventionmay comprise a fixed (or variable) number of credits which: 1) aremaximally representative of a broad market; and 2) have the highestLiquidity Score.

In another embodiment, a credit index according to the present inventionmay comprise a fixed (or variable) number of credits (e.g., bonds) thatare chosen in a balanced manner.

In another embodiment, a credit index according to the present inventionmay comprise the top liquid credits in a broad market.

In another embodiment, a credit index according to the present inventionmay provide a default probability that is lower than the broad market(in general, average default probability increases with the age of abond and decreases with minimum rating requirements on an index).

In another embodiment, a credit index according to the present inventionmay provide a mechanism for balancing diversification with liquidity byutilizing the inventive Liquidity Score concept. More particularly, anobjective of diversification is replication of an aggregate market, amanner of achieving diversification is by bringing new issues into theindex (e.g., on a monthly basis) and by balancing index componentsbetween sectors (to gain exposure to the entire broader market), and aresult of diversification is a low tracking error. On the other hand, anobjective of liquidity is to produce a tradeable and liquid index, amanner of achieving liquidity is by employing the Liquidity Scoreconcept and by bringing new issues into the index which are more liquidunder the Liquidity Score concept than existing issues. In addition,limited “slippage” may be employed as a variable to control theturn-over of credit into the Indices.

In another embodiment, a credit index according to the present inventionmay provide a mechanism for balancing diversification with liquidity andadministrative costs (associated with rebalancing the index bytransferring credits into and out of the index) by maximizing the liquidcredits in the index while minimizing the transference of credits intoand out of the index.

In another embodiment, a credit index according to the present inventionmay provide a flexible and transparent mechanism for giving an investorthe opportunity to reach a number of objectives, including, but notlimited to, maximization of total return, leverage, maturity flexibilityand principal protection.

In another embodiment, a family of credit indices according to thepresent invention may provide a mechanism for giving an investoralternative risk profile options with regard to varying terms andstructure and which offer a range of risk and return, as seen in FIG. 9,for example.

In another embodiment, a credit index according to the present inventionmay provide a mechanism for essentially tracking an allocation profileof a market (e.g., a sector rating of the market) while maintaining inthe index the top liquid credits available in the market (i.e., the topliquid credits from the liquidity profile of the market).

In another embodiment, a credit index of the present invention can havea number (e.g., 4) of large “super-sectors” (e.g.,Consumer/Finance/Industrial & Utilities/Telecom & Technology) dividedinto a number (e.g., 22) of separate industry sub-sectorclassifications. Further, a number (e.g., 11) of these sub-sectors maybe divided into further sub-classifications. This allows detailedmulti-layer analysis of the index that is believed to be necessary inthe increasingly sophisticated credit market.

In another embodiment, a credit index of the present invention canutilize a Market Profile (or “Reference Profile”) as shown in FIG. 10A.More particularly, as seen in this FIG. 10A, and in FIG. 10B, theReference Profile may have four sectors along one axis (e.g., Consumer,Finance, Telecommunications/Technology, and Industrial/Utility) andthree maturities along the other axis (e.g., 5 year, 10 year, and 30year). In addition, FIG. 10A shows various illustrative compositions ofthe above-mentioned Reference Profile.

In another embodiment, a credit index of the present invention can havea framework (e.g. a sector framework or a ratings framework) which issufficiently similar to the framework used by a credit analysisorganization (e.g., Moody's) to permit the calculation of a diversityscore essentially continuously may be provided.

In another embodiment, a credit index according to the present inventionmay provide a more efficient mechanism for engaging in variousinvestment strategies, including, but not limited to, total returnswaps, total return index-linked notes, principal protectedindex-participation notes, and any desired derivative product (such asoptions, futures, and swaps, for example).

In one specific example, which example is intended to be illustrativeand not restrictive, investors sharing a bullish view on a credit market(e.g., the European credit market, the U.S. credit market, or the Asiancredit market) could enter into a total return swap (“TRS”) in order toparticipate in potential market moves. Under this strategy, investorsmay assume diversified exposure without initial cash outlay andinvestors may gain credit exposure without costly replication strategiesand specific credit analysis expertise. Thus, this strategy may suitrisk takers with limited liquidity while providing full upside anddownside exposure. Because of hedging ability with the presentinvention, there may no longer be a need to match orders in order toexecute the various investment strategies previously discussed.

More particularly, as see in FIG. 11, the total return swap itself mayinitially be designed as a fixed term structure (e.g., 6 months) whereinthe investor receives/pays the appreciation/depreciation of a liquidcredit index according to the present invention at maturity according toa predetermined formula. In exchange, the investor may pay thecounterparty an agreed reference amount (e.g., a 3 month Euribor orLIBOR). The total return on the liquid credit index may comprise anyprice changes over a given period plus any accrued interest plus anycoupon payments and reinvestment income all divided by the price and theaccrued interest at the beginning of the given period. The pricing mayincorporate bid/offer spread on cash, as well as rebalancing on indexand financing spreads. In another embodiment, the total return swap maybe structured with several maturities.

In another embodiment, the present invention may be utilized inconjunction with one or more credit oriented Exchange Traded Funds(“ETF's”). Such credit oriented ETF's may include, but not be limitedto, bonds, bank loans, and/or credit swaps.

Of note, the credit ETF according to the present invention may: 1)provide the ability to expand and contract to keep price in line withthe underlying credits; 2) provide substantial liquidity; 3) providediversified credit exposure, including long exposure and the ability to“time the market” by coming into and out of the market (particularly toinvestors lacking the resources to gain such exposure on their own); and4) provide liability management, wherein exposure to the “class” ofholders of the ETF is controlled and wherein exposure is concentrated asdesired.

In another embodiment, a credit index according to the present inventionmay use a “roll” technique, wherein some or all of the credits which arebought and sold (i.e., moved into the index and moved out of the index)at a given time (e.g., during a periodic rebalancing) are bought andsold in one transaction. The periodic rebalancing may occur at anydesired time, including, but not limited to, daily, weekly, monthly,quarterly, semi-annually, or annually.

In another embodiment, a credit index according to the present inventionmay use a “cheapest to deliver” technique, wherein: 1) the index isweighted towards the largest issuers in a market and/or towardsparticular maturities of credits issued by such issuers; and/or 2)credits of same issuers are normalized through a mathematicalrelationship to improve liquidity. The normalization of credits ofdifferent issuers may be used as a substitute for the Liquidity Score ofthe present invention or as an element of the Liquidity Score of thepresent invention.

In another embodiment of the present invention the rules of the indexmay be governed by a Policy Committee (“Committee”). The Committee maybe composed of a predetermined number of external members (i.e., membersunrelated to a party initiating the index). In one specific example, thepredetermined number may be 50% of the full Committee. The Committee'sdecisions may be binding, and decisions may be required to be made withunanimity. The Committee may meet at least once a year to review therules and composition of the index in the light of changing marketstructure (though the Committee may also strive for continuity). Ifthere are exceptional circumstances that affect the entire market or aparticular bond, any member may be able to call a meeting to request aruling from the Committee as to whether certain bonds should be excludedfrom the index. In one specific example, the concern may be to ensurethe liquidity of the bonds in the index. Further, a ruling may berequested if a bond trades below a predetermined percent (e.g., 50%) ofpar or accreted value for a predetermined number of days (e.g., 20consecutive business days) after the value is verified with externaldata sources (e.g., Bloomberg, IDC) if available. Further still, aruling may be requested if a spread widens more than a predeterminedamount (e.g., 250 basis points) vs the index's spread.

In another embodiment of the present invention the rules for the bondsassociated with the broad index could be the same as or different fromthe rules for the bonds associated with the liquid index and the rulesfor bonds already in an index (e.g., the broad index and/or the liquidindex) could be the same as or different from the rules for bonds beingconsidered for inclusion in an index (e.g., the broad index and/or theliquid index).

In another embodiment of the present invention the “chronic poor biddingperformance” test may be modified such that if a bond tests positive onthe last trading day prior to the first of the month, the bond isdisqualified for a shorted period of time (e.g., only that comingmonth). In addition, liquid index incumbents that test positive mayremain members of the liquid index.

In another embodiment of the present invention a credit index which maybe used by a portfolio trader, which may be incorporated into a numberof different investment/trading strategies, which may be used with oneor more collateralized debt obligations (“CDB's”), and/or which providesaccess to a liquid asset is provided.

In another embodiment of the present invention the Liquidity Score maybe utilized to determine a bond's liquidity in place of and/or inconjunction with volume trading data (which may be difficult toacquire).

In another embodiment of the present invention weighting of the liquidindex is not necessarily performed using market weighting (wherein theremay be concentration risk (e.g., the need to buy a large dollar amountof one or a few bonds) when a big sector has relatively few bondsqualified for inclusion). Rather, or in conjunction with such marketweighting, the liquid index may use weighting which does not adjust themarket weight of a cell to cover a broad market but instead uses thenumber of bonds in the cell as a weighting mechanism (e.g., the numberof bonds that go into a cell are selected to achieve the desiredweighting relative to the broader market or index). Of note, thestandard deviation of sizes in each cell may, as a matter of practice incertain cases, “wash away”, wherein using the number of bonds forweighting essentially mirrors the results of market weighting.

In another embodiment of the present invention a bond issuer which couldfit in one or more industry sectors (i.e., a “conglomerate”), is placedin a single industry sector.

In another embodiment of the present invention a bond issuer which couldfit in one or more industry sectors (i.e., a “conglomerate”), is placedin multiple industry sectors.

In another embodiment of the present invention the Spread Volatilitytest utilizes the universe of all bonds available in the market.

In another embodiment of the present invention the Market Profiling maybe carried out annually, the Rebalancing may be carried out monthly, thebroad index may be priced daily, and the liquid index may be priced inreal-time or in quasi-real-time.

In another embodiment of the present invention performance of a liquid,tradable index may be measured using one or more of the followingmetrics: (a) tracking (how well does the liquid, tradeable index track abroad market or index); (b) transaction cost (relating to the totalnumber of bonds that turnover [in one example, which example is intendedto be illustrative and not restrictive, the turnover may be ⅔, or 20 fora 30 bond index]); (c) volumetric turnover (bid-bid/offer to bid [in oneexample, which example is intended to be illustrative and notrestrictive, this value may be about 70 basis points per year]); (d)diversity (e.g., Moody's diversity score [in one example, which exampleis intended to be illustrative and not restrictive, diversity may beabout 15.2 for a 30 bond index, wherein a higher score is better]); (e)incumbency premium (in one example, which example is intended to beillustrative and not restrictive, this value may be 60/40 [withinissuer/outside issuer]); (f) front loading (e.g., a bond enters theliquid, tradeable index the same month that the bond issues [in oneexample, which example is intended to be illustrative and notrestrictive, this value may be about ⅔]); (g) turnover period by period(this value may be qualitative); and (h) bonds selected are acceptableto one or more reviewers (this may be qualitative).

In another embodiment of the present invention the incumbency premiumassociated with the Liquidity Score may be determined as follows: Bondsthat were members of the liquid index in at least the prior month may beassigned an incumbency premium to their Liquidity Score to reflect thenotion that a new entry candidate would have to outscore an incumbent bya reasonable margin of additional liquidity in order to justify theexpense of the trade. In addition, such incumbency premium may help tocontrol turnover. In any case, in one specific example (which example isintended to be illustrative and not restrictive) the incumbency premiummay be +6.0. More particularly:

-   -   The incumbency premium may stay constant for a new liquid index        entrant for a “honeymoon” of x number of months (e.g., 4        months), and then the incumbency premium may begin to decay        according to: exp(−0.3×(incumbent months−honeymoon))×6.0.    -   All other bonds from an issuer who has an incumbent bond may        also receive a premium equal to 2.4×exp(−0.3×(incumbent        months−honeymoon) [where honeymoon=0]. This “intra-issuer        incumbency premium” may help facilitate moves to the on-the-run        bond within a large complex of debt from a single issuer.

In another embodiment of the present invention the Market Profiling, theAnnual Updating, the Selection Process, and/or the Bond Weightingassociated with one or more indices (e.g., a broad index and/or a liquidindex) may operate as follows:

-   -   Market Profile. Profile the broad market across industry sector        and maturity dimensions. The Market Profile may be a 3×3 matrix,        e.g.: 5-10-30 years to maturity on one axis, and        Financial-Telecom-Other on the 2^(nd) axis (the intersection of        each of these 3 elements may thus produce a final matrix of 9        cells).    -   Annual Update. Generate a new annual profile (e.g., every        November 1, a date which corresponds roughly to the end of the        underwriting season) as follows: The bonds in the broad index        are scattered into the matrix, and the number of bonds in each        cell is recorded. The proportionally equivalent number of bonds        for the liquid index is then computed and recorded. That number        stays constant for one year. Because underwriting effects during        the year will change the fundamental composition of the broad        market, do not load up the entire liquid index according to the        matrix guideline. Instead, try to assign 15 bonds for the matrix        based on this profile, subject to the conditions laid out below        with reference to the Selection Process.    -   Selection Process. The finalized qualified entrant list is        rank-ordered according to final Liquidity Score (which Liquidity        Score has been described above) and the top x (e.g., 30 to 100)        bonds are chosen in the following three phases:        -   a) First pass: The top x (e.g., 30 to 100) bonds are chosen,            x per issuer (e.g., 1, 2, or 3), based on full 3-factor            liquidity scores (that is, raw score+incumbency            premium+issuer premium).        -   b) Second pass: The initial set of choices is then checked            against the Market Profile matrix, which assigns a preferred            bond count for each cell of the cube. A cell represents a            cross-section of maturity, and industry sector. The goal of            the matrix is to keep the number of bonds in each such            cross-section, or cell, roughly proportionally            representative of the broad market. The matrix is also used            later in the algorithm to weight the bonds in a manner that            is proportionally representative of the broad market (Bond            Weighting below). For any cell that is underrepresented, a            scan is made of the unselected bonds from that cell. If a            bond is available that is y % (e.g., 90%) of the Liquidity            Score of a bond in the current top queue from another cell,            the swap is executed.        -   c) Third pass: A second swapping routine similar to the cell            representation logic is then applied to test that each            “element” on the maturity dimension of the matrix has at            least x (e.g., 5) bonds. If a given element is            underrepresented, a scan is made of the unselected bonds            from that element, and if one can be found that is y %            (e.g., 90%) of the Liquidity Score of a chosen bond from            another element, the swap is executed.        -   d) To help diversify the product's credit risk, no more than            x issues (e.g., 1, 2, or 3) per issuer may enter.    -   Bond Weighting. The base market weight of each chosen bond is        then adjusted according to the following methodology (as opposed        to being equal price weighted as discussed above):        -   a) Each bond in the broad index is placed into the            appropriate cell in the matrix, and each bond in the liquid            index is placed into a second matrix of the same design. The            cell factors (see b below) from the prior month are applied            to the current bonds. The percentage of total market value            for each cell 1-9 relative to the market value of the total            matrix is recorded for both matrices.        -   b) Factors are created for each element of each dimension of            the Market Profile matrix—six in total. The product of any            pair of such factors, selected from the two different matrix            dimensions, defines a cell factor. The cell factors are used            to adjust the market sizes of the liquid index bonds in each            one of the 9 cells. During rebalancing, the prior month            factors are first applied. If the total market size            percentages for the individual rows or columns of the liquid            index matrix profile have drifted from the broad ones by            less than x % (by subtraction), wherein x % is 2.5%, for            example, the old factors remain in place for the current            month. This reflects the notion that the cost of incurring            the friction to buy additional securities only becomes            worthwhile when tracking error is materially endangered. New            factors are computed otherwise by solving a simultaneous set            of equations to force the drift down to zero.

In another embodiment of the present invention the following bondselection criteria may be used. In one specific example (which exampleis intended to be illustrative and not restrictive), the broad index maybe composed of euro-, euro-legacy-currency-, or sterling-denominatedbonds issued by corporate issuers and rated by either (or both) Moody'sand S&P. The index composition may be eligible for periodic rebalancingat a desired time (e.g., once a month). In one specific example (whichexample is intended to be illustrative and not restrictive), therebalancing may occur after the close of business on the last businessday of the month.

More particularly, in one specific example (which example is intended tobe illustrative and not restrictive), for a bond to be included in theindex (and/or remain in the index), the bond may have to meet thecriteria described below at month-end:

-   -   Candidates:        -   Bonds denominated in euros (or any European legacy currency)            or the British pound.        -   Geographic scope: The issuer or the issuer's guarantor (in            the case of a finance subsidiary) may have to be domiciled            or have most of its operations in Japan, Western Europe, or            North America.        -   New issues may have to have been settled before the            rebalancing date to be included in the index for the next            period. In one example (which example is intended to be            illustrative and not restrictive), only bonds issued after            Jan. 1, 1997, may be considered.        -   Preferreds, perpetuals, and floating rate notes may not            enter the index—however, bank capital step-ups that have            this form may enter if the other rules are satisfied.        -   Convertibles may not be considered as part of the candidate            universe.        -   The information for the selection of the bonds and their            corresponding rating may be derived from the Bondware            information service and/or the ISMA information service,            each of which may be complemented by using it in conjunction            with any further relevant market information.        -   In one example (which example is intended to be illustrative            and not restrictive), for a bond to enter and/or remain in            the index, the remaining time to the bond's maturity may            have to be equal to or greater than x year(s) (e.g., 1 to 3            years).    -   Quality:        -   The bond may have to be rated by S&P and/or Moody's. In one            specific example (which example is intended to be            illustrative and not restrictive), the index may not include            non-rated securities.        -   Any existing credit ratings may have to be consistent with            the index in which the bond will be classified, for example:            -   High yield: below investment grade but not in default                (BB+ or lower by Standard & Poor's and Ba1 or lower by                Moody's)            -   Investment Grade: above high yield        -   In one specific example (which example is intended to be            illustrative and not restrictive), an investment grade index            may not include split-rated (e.g., Baa3/BB+ or Ba1/BBB)            issues.        -   In one specific example (which example is intended to be            illustrative and not restrictive), issues rated D by S&P or            that have been subject to a default press release by Moody's            may not enter the index; those issues in the index that are            subsequently downgraded to D by S&P or subject to a default            press release by Moody's may be taken out of the index on            the next rebalancing date.    -   Minimum Size:        -   The outstanding face value of the bond must be greater or            equal to:            500 million in one example,            500 million equivalent in another example,            200 million in another example,            200 million equivalent in another example,            100 million in another example,            100 million equivalent in another example, £60 million in            another example, and            60 million equivalent in another example (wherein each            example is intended, of course, to be illustrative and not            restrictive)    -   Bond Type:        -   Fixed coupon schedule: floating rate notes may be excluded            (bank capital being a possible exception to this rule, as            noted above).        -   Step-ups with a coupon structure that changes on fixed dates            or is a function of the issuer's rating may be included, as            long as the formula and schedule are known at issuance.            Deferred coupon bonds, zero coupon bonds, PIKs            (pay-in-kinds) may be included as well.        -   In one specific example (which example is intended to be            illustrative and not restrictive), bonds with warrants            attached may not be included in the index.    -   Monthly Rebalancing:        -   The composition of the index may be held constant for any            given calendar month to ensure continuity during the month            and to avoid jumps unrelated to the price movements of the            bonds.        -   In one specific example (which example is intended to be            illustrative and not restrictive), the inclusion and            exclusion criteria above may be applied at month-end, after            the close of business. If a bond conforms to all criteria            listed above at month-end, it may be included in the index            calculations for the next month. Bonds that were in the            index, but that no longer satisfy all the criteria at            month-end, may be removed from the index.        -   If a bond becomes eligible in the middle of the month, it            may still need to pass the test at the end of the month, and            may only be included upon rebalancing at month end.        -   When a bond is called, it may remain in the index at its            call price until the end of the month, after which it may be            removed.        -   Changes in issue size that take place during the month may            be taken into consideration only at the next rebalancing            date.    -   Subindices:        -   The bonds composing the subindices may be a subset of the            bonds in the composite indices, and therefore have to pass            the same eligibility tests.    -   Rating Comment for the Quality Sector Subindices (AAA, AA, A,        BBB, BB, B, and CCC):        -   If a bond is rated by only one agency (e.g., Moody's or            S&P), or if both agencies classify it in the same quality            sector, it may be included in the corresponding quality            sector subindex. For bonds with split ratings: the lower            rating may prevail for Investment Grade indices and the            higher rating may prevail for the High Yield indices.    -   Rating Migration from One Index to The Other:        -   In one specific example (which example is intended to be            illustrative and not restrictive), bonds that are split            rated (investment grade/high yield) with the ratings            differing between Moody's and S&P may not be part of either            an investment grade index or a high yield index. In this            example, a bond may only be included if both agencies            classify it in the same universe—or if it is only rated by            one agency.        -   In one example (which example is intended to be illustrative            and not restrictive), after a bond has migrated into            investment grade (Rising Star) or high yield (Fallen Angel)            from the other universe, it must remain x months (e.g., 3            months) in the new universe before it can be included in an            index at the next following rebalancing date. This rule is            intended to reduce volatility in the composition of the two            indices, and to allow for the market participants to assess            its fair value and credit worthiness.

In another embodiment, a tradeable, liquid, and balanced credit indexaccording to the present invention may use the following multi-prongedbond selection methodology.

-   -   In one prong of the bond selection approach the index structure        may be determined as follows in this specific example (which        example is intended to be illustrative and not restrictive):        -   The index may be composed of a predetermined number of bonds            (e.g., 30 to 100). This number is assuming, of course, that            there are enough bonds available in the market that satisfy            all selection criteria. In any case, the bonds in each index            may form a subset of the bonds included in a corresponding            aggregate index. The index structure may be based on market            framework which seeks representation along x dimensions            (e.g., 3) of the market (such as sector, ratings and            maturity, for example (which example is intended to be            illustrative and not restrictive)) and the index may seek to            track the structure of a corresponding bond market (e.g., a            corporate market). A Reference Profile for this purpose may            be redefined periodically (e.g., monthly) as those bonds            that constitute the corresponding aggregate index. This can            help to ensure that the Reference Profile broadly evolves            with the current trends in the market. To seek            representation and balance, the index may comprise a minimum            number of bonds proportional to the percentage of bonds            found in the market along the above-mentioned dimensions.    -   In an alternative prong of the bond selection approach the index        structure may be determined as follows in this specific example        (which example is intended to be illustrative and not        restrictive):        -   The index may be composed of a predetermined number of bonds            (e.g., 30 to 100). This number is assuming, of course, that            there are enough bonds available in the market that satisfy            all selection criteria. In any case, the bonds in each index            may form a subset of the bonds included in a corresponding            aggregate index. The index structure may be based on market            framework which seeks representation along x dimensions            (e.g., 3) of the market (such as sector, ratings and            maturity, for example (which example is intended to be            illustrative and not restrictive)) and the index may seek to            track the structure of a corresponding corporate bond            market. A Reference Profile for this purpose may be            redefined periodically (e.g., monthly) as those bonds that            constitute the corresponding aggregate index. This can help            to ensure that the Reference Profile broadly evolves with            the current trends in the market. Subsequently, issuers are            selected who are the most representative of the market size            and/or market capitalization. Then, at least one            representative issue is selected from each of the selected            issuers—maximizing liquidity. The resulting bond yields then            have their weights adjusted to meet the profile of the            desired market—wherein the weights are a function of both            the total debt outstanding for the issuer and the adjustment            of the three dimensional model to fit the desired market.    -   In the next prong of the bond selection approach, the selection        of specific bonds may be carried out as follows in this specific        example (which example is intended to be illustrative and not        restrictive):        -   While the structure of each index may be constant for a            predetermined interval (e.g., a whole year), the bonds            comprising the index to “fill the matrix” may be chosen at a            more frequent interval (e.g., at the end of every month)            according to the following criteria:            -   Only bonds that are represented in a corresponding                aggregate index may enter into the index. The minimum                size of the issues in the indices may be:                500 million in one example,                500 million equivalent in another example,                200 million in another example,                200 million equivalent in another example,                100 million in another example,                100 million equivalent in another example, £60 million                in another example, and                60 million equivalent in another example (wherein each                example is intended, of course, to be illustrative and                not restrictive)            -   To discriminate among bonds, a Liquidity Score may be                imputed to each bond. As discussed above, the Liquidity                Score may be a function of, among other things, the                bond's size, the total issuance size of all bonds from                that issuer in the index, and the bond's age. In one                specific example (which example is intended to be                illustrative and not restrictive), the higher the bond's                and the issuer's outstanding amounts, and the lower the                age, the higher the Liquidity Score.            -   In a specific example (which example is intended to be                illustrative and not restrictive), a bond may be                preferred to another one if the first bond has a higher                Liquidity Score; however, bonds which were in the index                in the previous period may receive a premium to their                Liquidity Score in order to reduce turnover to cases                where imputed liquidity is stronger beyond a preset                threshold.            -   In one specific example (which example is intended to be                illustrative and not restrictive), only one issue per                issuer may be included in any index, unless it is part                of another cell (e.g., different maturity or different                rating (if these define different cells for that                index)).

In another embodiment of a credit index according to the presentinvention, an index value calculation methodology may comprise thefollowing procedure:

-   -   Calculations:        -   For the aggregate indices, the index may be treated as a            portfolio where each bond's weight is equal to its market            capitalization. In one specific example (which example is            intended to be illustrative and not restrictive),            calculations may be made on a daily basis, using bid or ask            prices (with reference to the market conditions prevailing            at that time in that market (e.g., 6 p.m. London time or 3            p.m. New York time)).    -   Total Return:        -   The components of the total return may include price            changes, accrued interests, coupon payments, and            reinvestment income on cash flows received in the middle of            the period. In one specific example (which example is            intended to be illustrative and not restrictive), the total            return may be first computed on a daily basis for each            single bond “i” following the formula:

TR _(i)=((P1−P0)+(A1−A0)+C*(1+r*nb days/d))/(P0+A0), where

-   -   -   -   P0=Clean (flat) price at the beginning of the period (if                the bond is new that period then P0 is offer; if the                bond is incumbent that period then P0 is bid).            -   P1=Clean (flat) price at the calculation date (always                bid)            -   A0=Accrued interest at the beginning of the period            -   A1=Accrued interest at the calculation date            -   C=Coupon payments received (note that this cash flow                does not include repayments of the bond's par amount                outstanding at the call price when a bond is called)            -   r=Euro or GBP one-month LIBID rate at coupon payment                date            -   d=Day count convention for the reference LIBID                instrument.

        -   Then, a market-capitalization-weighted average of the            individual total returns may be calculated using the            beginning-of-the-period market value of each bond i as            follows:

Index TR=Σ _(i) TR _(i)×Weight_(i), where

-   -   -   -   Weight_(i)=Par Amount_(i)×Dirty Price_(i)/(Σ_(i) Par                Amount_(i)×Dirty Price_(i)) taken at the last                rebalancing date.

    -   Index Value:        -   All indices and subindices may be set at 100 at inception.        -   The index value at month-end may be the compounded value of            the monthly returns. Therefore, in one specific example            (which example is intended to be illustrative and not            restrictive) the formula:

Index Value=100×π_(t) (1+TR _(t)), where TF_(t) are the total returnscalculated for the past months since inception may be used.

-   -   -   During the month, the index value may be calculated by            applying the total return since the start of that month to            the index level at the last rebalancing date. Therefore, in            one specific example (which example is intended to be            illustrative and not restrictive), the formula may be as            follows:

Index Value_(Current)=Index Value_(Rebalancing Date)×(Index TR)

-   -   -   The index may be reweighted on a monthly basis using bond            issuance, call and tender, and/or other relevant            information.

    -   Geographic scope of the indices:        -   In one specific example (which example is intended to be            illustrative and not restrictive), the bonds may come from            issuers in Western Europe, North America and Japan. More            particularly, in this example, only bonds from the following            countries may be included in the indices: Andorra, Austria,            Belgium, Denmark, Faeroe Islands, Finland, France, Germany,            Gibraltar, Greece, Iceland, Ireland, Italy, Liechtenstein,            Luxembourg, Malta, Monaco, Netherlands, Norway, Portugal,            San Marino, Spain, Sweden, Switzerland, United Kingdom,            Vatican City State, United States, Canada, or Japan.

Referring now to FIG. 12, a diagram depicting a “net gain testing”process according to an embodiment of the present invention is shown. Asseen in this FIG. 12, the net gain testing is utilized to test whether anumber of proposed transactions would result in a net Liquidity Scoregain to an index. More particularly, in one example operation (whichexample is intended to be illustrative and not restrictive), if Bond#1comes into Cell#4 and “knocks out” Bond#2, Bond#3 must also come out ofCell#5 and be replaced by Bond#4 (Bond#3 must come out when Bond#1 goesin because Bond#1 and Bond#3 are issued by the same issuer and in thisexample only one issue per issuer is permitted in the index). The netgain testing process will not allow these transactions to proceed unlessthe change in the average Liquidity Score for the index is positive(i.e., unless the sum of the Liquidity Scores of the incoming bonds isgreater than the sum of the Liquidity Scores of the outgoing bonds).

Of note, this FIG. 12 depicts a 2×3 matrix (5 years, 10 years, and 30years on one axis and Financial and Non-Financial on the other axis) forthe purposes of illustration only, and any other desired matrix sizeand/or composition may, of course, be utilized. Further, while the netgain testing process is described with reference to FIG. 12 inconnection with a 1 issue per issuer case, such net gain testing may, ofcourse, be utilized with other cases (e.g., 2, 3, or more issues perissuer). Further still, in another example the net gain testing maypermit a number of transactions as long as the net result is not a lossin average Liquidity Score for the index (i.e., if the net gain ispositive or zero).

In another embodiment data from an NASD sponsored program called “TRACE”(designed to provide trading related data on essentially everyapplicable bond trade) may be utilized. More particularly, data fromTRACE may be utilized in the calculation of a Raw Score and/or aLiquidity Score according to the invention (and/or the data from TRACEmay be utilized to verify a Raw Score and/or a Liquidity Score). In thisregard, it is noted that the TRACE data may be utilized in one example,which example is intended to be illustrative and not restrictive, todetermine how prices move from trade to trade. In another example of howsuch TRACE data may be utilized (which example is intended to beillustrative and not restrictive), it is noted that the frequency withwhich an instrument (such as a bond) trades may aid in providing anindication of liquidity.

In another embodiment data from program(s) other than TRACE whichprovide trading related data and/or data from other sources (e.g.,investment institutions other than the sponsor of a broad index and/or aliquidity index) may be utilized in the calculation of a Raw Scoreand/or a Liquidity Score according to the invention (and/or such datamay be utilized to verify a Raw Score and/or a Liquidity Score).

In another embodiment a credit index (e.g., a liquid credit index) isprovided which is periodically rebalanced and tradeable.

In another embodiment a system and method are used for structuring acredit index (e.g., a liquid credit index) which is periodicallyrebalanced and tradeable.

In another embodiment a system and method are used for operating acredit index (e.g., a liquid credit index) which is periodicallyrebalanced and tradeable.

In another embodiment a system and method are used for determining theliquidity of a credit, such as a bond.

In another embodiment a mechanism for structuring and/or operating arule-based modified market capitalization weighted index of bonds isprovided.

In another embodiment a mechanism is provided for ranking liquidity.

In another embodiment a credit index (e.g., a liquid credit index) isprovided which utilizes a mechanism for ranking liquidity.

In another embodiment if there are not enough bonds initially availableto populate the liquid index (e.g., if there are insufficient bondsavailable in the market and/or in the broad index which meet therequirements of the liquid index) then the liquid index may be populatedwith as many bonds as possible and periodic re-profiling (e.g., monthly)may be carried out until the liquid index is fully populated.

In another embodiment a software program for determining a liquidityscore associated with a bond issued by an issuer is provided,comprising: means for determining a raw score which is a function of theage and size of the bond; means for determining a model issuer premiumassociated with the issuer; means for determining an applied issuerpremium associated with the bond, which applied issuer premium is basedat least in part on the model issuer premium; and means for combining atleast the raw score and the applied issuer premium to determine theliquidity score.

In another embodiment a software program for populating an index of aplurality of bonds, each of which bonds is issued by an issuer isprovided, comprising: means for disqualifying any of the bonds in aninitial candidate subset of bonds from inclusion in the index of bondsfor one or more disqualifying conditions; means for determining aliquidity score for each of the bonds in the initial candidate subset ofbonds which is not disqualified, wherein said liquidity score isdetermined at least in part by: (a) determining a raw score which is afunction of the age and size of the bond; (b) determining a model issuerpremium associated with the issuer; (c) determining an applied issuerpremium associated with the bond, which applied issuer premium is basedat least in part on the model issuer premium; and (d) combining at leastthe raw score and the applied issuer premium to determine the liquidityscore; means for segmenting the bonds in the initial candidate subset ofbonds into a matrix; and means for including one or more bonds from theinitial candidate subset of bonds in the index of bonds based at leastin part upon the liquidity score of the included bond and a position ofthe included bond in the matrix associated with the initial candidatesubset of bonds.

While a number of embodiments of the present invention have beendescribed, it is understood that these embodiments are illustrativeonly, and not restrictive, and that many modifications may becomeapparent to those of ordinary skill in the art. For example, theanalytic data provided via the web-based interface may includeperformance data (such as performance summary, performance attribution,best/worst performers, sector weightings, relative value analysis, andspread movements shown against their 60-day trading range, for example).Further, such performance data may be given on a comparative basis (suchas across industries, for example,) and may be shown in graph form.Further still, the present invention may be employed in the context ofan Index Mutual Fund (i.e., a mutual fund composed of one or moredifferent indices), wherein each index may use liquid underlyingcomponents (e.g., credits). Further still, while the present inventionhas been described principally with respect to a method for structuringand/or implementing a credit index (and/or a Liquidity Score), acorresponding software program and/or system may of course be utilizedto structure or help to structure a credit index and/or to implement orhelp to implement a credit index and/or to structure or help tostructure a Liquidity Score and/or to implement or help to implement aLiquidity Score. Further still, the present invention may be employedwith a “basket” of financial instruments and the disclosure abovemodified accordingly. Further still, the broad index used as a candidatepool for the liquid index of the present invention may utilize anydesired operating rules (e.g., bonds must settle prior to the first ofthe month in order to enter for that month; bonds are assigned tospecific issuer entities by a sponsor and/or administrator associatedwith the broad index; and/or bonds are coded into the industry taxonomyby a sponsor and/or administrator associated with the broad index).Further still, the Market Profile matrix may comprise what is sometimereferred to mathematically as a “hyper-cube”. Further still, the RawScore may be calculated as a planar regression (e.g., against volumedata). Further still, any of the functions and/or constants disclosedherein could be changed or modified according to tests on actual dataand/or simulations. Further still, the Liquidity Score of the presentinvention may be used on its own (i.e., not in connection with anindex), wherein the Raw Score and/or Issuer Premium components are usedto calculate the Liquidity Score without reference to the IncumbencyPremium component. Further still, the act of including a credit in anindex according to the present invention (e.g., a liquid, tradeableindex) may increase the liquidity of the credit.

1. A software program for populating an index of a plurality of bonds,each of which bonds is issued by an issuer, comprising: means fordisqualifying any of the bonds in an initial candidate subset of bondsfrom inclusion in the index of bonds for one or more disqualifyingconditions; means for determining a liquidity score for each of thebonds in the initial candidate subset of bonds which is notdisqualified, wherein said liquidity score is determined at least inpart by: (a) determining a raw score which is a function of the age andsize of the bond; (b) determining a model issuer premium associated withthe issuer; (c) determining an applied issuer premium associated withthe bond, which applied issuer premium is based at least in part on themodel issuer premium; and (d) combining at least the raw score and theapplied issuer premium to determine the liquidity score; means forsegmenting the bonds in the initial candidate subset of bonds into amatrix; and means for including one or more bonds from the initialcandidate subset of bonds in the index of bonds based at least in partupon the liquidity score of the included bond and a position of theincluded bond in the matrix associated with the initial candidate subsetof bonds.